Question

Consider the following international investment opportunity. It involves a gold mine that can be opened at a cost, then produces a positive cash flow, but then requires environmental clean-up:

Cash Flow:

Year 0: -25,000 Euro

Year 1: 60,000 Euro

Year 2: -36,000 Euro

The current exchange rate is $1.80 = €1.00. The inflation rate in the U.S. is 6 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent. Find the dollar-denominated NPV of this project.

Answer 1

Cash flow 0 in USD = 25000*1.80

cash flow 1 in USD = 60,000*1.80*1.06/1.02

casg flow 2 in USD = -36,000*1.80*1.06*1.06/1.02*1.02

Discount rate	8.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(45,000.00)	0	(45,000.00)	(45,000.00)
112,235.294	1	103,921.57	58,921.57
(69,982.007)	2	(59,998.29)	(1,076.72)

NPV = -1076.72